Consumables propel Q3 gains at Dollar Tree

Dollar Tree is rolling into the year-end holiday season with momentum after posting better-than-expected third-quarter results on Thursday.

Buoyed by remodeled stores with expanded food assortments, the dollar-store chain reported comparable-store sales growth of 3.2% for the third quarter (3.3% when adjusted for fluctuations in the Canadian dollar) and raised its earnings outlook for the year.

Analysts were encouraged by improvements at the company’s Family Dollar banner and a strong performance at Dollar Tree stores.

“Results demonstrated the consistency of Dollar Tree … while Family Dollar continues to show sequential improvement across the top and bottom lines,” Christopher Prykull, an analyst at Goldman Sachs, said in a research note.

Currency-adjusted same-store sales at Dollar Tree were up 5.2% for the quarter, marking the banner’s 39th consecutive quarter of same-store sales gains, while Family Dollar recorded a same-store sales increase of 1.5%.

Gary Philbin, president and CEO, Dollar Tree, credited strong sales of consumables at both banners in the quarter. Top-performing categories at the Dollar Tree banner included snacks and beverages, food, household products and stationery.

“Both consumables and discretionary [merchandise] comped at better than 4.5% for the quarter,” he said in a conference call with analysts, citing strong sales of seasonal merchandise in the discretionary category. “Back to school was our best season in several years,” he said, adding that early response to Christmas craft and décor items has been “encouraging.”

The company added freezers and coolers at 125 Dollar Tree stores during the quarter, bringing the total of Dollar Tree stores that have refrigerated and frozen foods to 5,133 stores, out of 6,604 locations.

He noted that each of Dollar Tree’s geographic zones recorded comparable-store sales above 3% for the period, with the strongest growth in the Southwest, Northeast and Midwest.

At the Family Dollar banner, improved food merchandising contributed to the sales gains, Philbin said. The company renovated 191 Family Dollar stores in the third quarter, improving adjacencies and endcaps and expanding the assortment of food in coolers and freezers.

“We continue to be very pleased with the initial results we are seeing in these stores, and especially about the feedback we are receiving from our customers and store teams,” said Philbin.

The renovations include expanded beverage and snack offerings, including grab-and-go coolers for immediate consumption located near the checkout area, as well as expanded adult beverage offerings in some stores.

The company is also upgrading its private label assortments to become more like national brand equivalents, backed with a 100% customer satisfaction guarantee.

“These brand improvements are taking place across the store and are already impacting performance in household products, candy, snack and beverage, hardware vitamins and others,” said Philbin.

The company has also been adept at capturing a share of Supplemental Nutrition Assistance Program (SNAP) benefits, Philbin explained.

“I think there's a customer that still is under pressure,” he said. “Rents continue to rise. Healthcare continues to rise. We have to be right on when they have money in their pocket.”

Net income for the third quarter rose 39.8%, to $239.9 million, on a 6.3% increase in sales, to $5.32 billion in the year-ago third quarter.

Gross profit margin for the Dollar Tree banner was 35.1% for the third quarter, up 30 basis points over year-ago results, while gross margins at the Family Dollar banner were up 130 basis points, to 27.5%. The company attributed the swing at Family Dollar to lower merchandise cost, lower markdowns and lower distribution costs.

The gains in sales and profit margins led the company to raise its sales and earnings forecast for the year. Sales are now expected to be $22.2 billion to $22.31 billion, vs. previous projections of $22.07 billion to $22.28 billion. Same-store sales are projected to grow in the low single digits. Net income is projected to be between $4.64 and $4.73, compared with previous guidance of $4.44 to $4.60.

“Overall, we were really pleased with our results through the business and are enthusiastic about the opportunities ahead of us,” said Philbin.